Unit 1: Introduction to Financial
Management
Finance
-deals with the study of how the
components of a financial system
manage resources and formulate
important and sound decisions.
-is different from accounting. Accounting
is concerned with recording, preparing
periodic reports, analysis, and
dissemination of information about a
company’s assets, liabilities, and equities.
(Financial managers utilize this accounting
information and the information obtained
from financial markets to decide how a
business should manage its assets,
liabilities, and equity.)
-according to experts, finance relate with
the activities of acquiring, spending, and
managing money and other financial
assets by individuals, institutions,
governments and businesses (Melicher
and Norton 2017).
❖ Personal finance deals with
saving, investing, and spending
money depending on personal
goals and desires.
❖ Public finance involves
government taxation, budgeting,
spending, and debt to provide
services to the public.
❖ In businesses, finance deals with
obtaining, managing, and using
funds to achieve the company's
goal of maximizing shareholder
value.
Finance is a broad field that deals with
activities in the financial system. It has
three areas of study that interact with
each other: financial institutions and
markets, investments, and financial
management.
● Financial institutions and markets,
such as banks, insurance
companies, and investment
companies help facilitate the flow
of funds between savers and
borrowers or investors.
● Financial management involves
financial analysis and planning, as
well as decisions on investment ,
financing and capital structure,
and asset-management to achieve
business goals.
Financial Management
-is one of the areas of study in finance.
-it is “the science and art of managing
money” (Gitman and Zutter 2012)
-involves application of management
functions such as planning, organizing,
leading, and controlling financial assets to
achieve organizational goals.
The Financial System
-exists when people, businesses, and
governments interact to facilitate and
expedite the flow of funds or financial
capital between savers and borrowers or
investors, or from savings to investments.
-consists of financial institutions, financial
markets, and
financial instruments where the exchange
of funds occurs.

Figure 1. The financial system facilitates
the flow of funds from sources to users.
Financial institutions
-is an organization that directs the
transfer of financial resources from its
source to potential users (Kaliski 2007).
-plays the part of an intermediary,
managing the efficient flow of funds
between savers and borrowers (Collins
2012).
-involved with deposit taking, finance,
insurance, investment, pension, and risk
management (Kaliski 2007).
-categorized as either depository or non-
depository institutions.
-commercial banks, investment banks,
and credit
unions are examples of depository
institutions
-finance companies, insurance
companies, brokerage firms, and pension
funds may be classified as non-depository
(Collins 2012).
Financial Markets
-pave the way for the financial manager to
acquire funds from various sources
(Kaliski 2007).
-the exchange of financial resources
happens in financial markets, which can
either be capital or money markets.
➔ Capital markets deal with long-
term debt and corporate
shares(include securities which are
traded through brokers and
dealers).
➔ Money markets involve short-
term debt securities(such as
treasury bills, commercial paper,
and negotiable instruments from
the government and other
financial institutions)
Financial Instruments
-instrument is referred to as any contract
which produces a financial asset of one
party while creating a financial liability or
equity instrument of another (IFAC 2020).
-Corporate bonds, checks, futures, option
contracts, and shares of stock are
examples of financial instruments.
Shareholders’ Wealth Maximization
-the overall goal in business finance
-balances short-term and long-term
benefits in a way that profit-maximizing
goals cannot (McLaney 2009, 23).
-Wealth maximization is the idea of
increasing the business's value to
increase the value of shares held by its
stockholders.
➔ requires the management to
constantly seek the
highest possible returns on
invested funds while decreasing
any associated risk of loss.
➔ holds the objective of ensuring the
maximum return to shareholders
➔ to do this, managers should
consider the risk and timing linked
with expected earnings per share
to maximize the stock price.
-Profit maximization, unlike wealth
maximization, is a short-term goal.
➔ company may maximize its short-
term profits at the expense of its
long-term profitability.
➔ to do this, company may need to
borrow money to increase sales or
expand production capacity.
The Corporate Organizational Structure
-To maximize the wealth of the owners,
financial managers need to determine the
appropriate assets for a business, how to
acquire them, and how to use them to get
the best possible financial return from
their use.
-A common corporation is divided into
various departments, each of which is
responsible for a different set of tasks.
The Board of Directors
-A corporation is guided by a board of
directors (BOD) which are elected by
the shareholders.
-The BOD represents the
shareholders in overseeing the
business. The following are some of
the responsibilities of the board of
directors:
1. Set direction for the business and
establish corporate policy
2. Hire and terminate members of
the top management including the
president
3. Determine the compensation of
the key executives
4. Review and disclose major
business decisions
The President and Chief Executive
Officer (CEO)
-The employed management of a
corporation is headed by the
President and Chief Executive Officer
(CEO). The following are some of the
responsibilities of a President and CEO:
1. Carries out the strategy and policy of
the board of directors
2. Provides leadership for management
and employees
3. Sets long-term operational direction
4. Takes accountability for all company
activities and results in the BOD
(In some companies, the President and
the CEO are separate persons and
entities; in this case, the CEO is the
highest officer in the company, and the
president is the second-in-command. The
CEO focuses on growing the company's
value and maximizing its wealth, while the
president works to ensure business
operations and other short-term goals
such as profit maximization.)
Vice-President for Sales and Marketing
-The Sales and Marketing department is
generally responsible for growing the
revenue and client portfolio of the
company. The Vice-President for Sales and
Marketing, who heads this department,
has the following responsibilities:
1. Generates campaigns, business, and
market development
2. Provides strategic direction promotion
and advertising
3. Develops strategic sales plans based on
company goals that will promote sales
growth
and customer satisfaction
4. Creates collateral materials, and
management of market research
5. Oversees the developments in sales and
marketing, including the activities of the
team members
Vice-President for Production
-The production department is
responsible for the creation of goods and
services. The Vice-President for
Production heads this department, and
has the following responsibilities:
1. Provides leadership and management
to the production team and tracks the
development of the products
2. Oversees maintenance staff that is
responsible for the equipment
3. Plans, directs, and coordinates the
development and manufacture of all
products that meet customers' demands
4. Ensures that the company uses the
most efficient, effective, and economically
viable methods for the production of the
company's products
Vice-President for Administration
-This office conducts much of the human
resources and general management
activities. It is headed by the Vice-
President for Administration who has the
following responsibilities:
1. Ensures security and safety in
publications activities.
2. Coordinates with finance and sales and
marketing departments
3. Provides property management
4. Assists in recruitment
5. Assists with payroll , employee training,
and performance reviews
Vice-President for Finance
The Vice-President for Finance or the The Roles of Financial Manager
Chief Financial Officer (CFO) supervises all -Financial managers also make decisions
phases of financial activity, and is based on the information they obtain
responsible for planning and managing from the financial system.
the company’s financial resources. The -The four important roles of a financial
following are the responsibilities of the manager are financing, investing,
Vice-President for Finance: operating, and dividend policy.
1. Acquires funds through financing
methods
2. Leads and formulates investing
decisions
3. Plans and control funds for operating
activities
4. Formulates effective dividend policies

● Under the CFO are several

managers. The top-level financial
managers in many companies are
treasurer and controller. Both of
these positions are supported by a
number of financial specialists.
● The treasurer handles external
financing matters and has
responsibility for the management
of a company’s cash, investments,
and other financial resources as In accounting, you might have learned that
well as relationships with investors dividends are part of the corporation's earnings
and creditors. which the company distributes to its investors.
● The controller is concerned with The factors affecting the dividend decision of a
internal matters such as being in company are the following: earnings, stability of
charge of accounting and the dividends, growth prospects, cash flow positions,
financial records of the and preference of shareholders. It is the financial
organization and provides support manager’s responsibility to determine the best
for executives and other dividend policy which maximizes the market
managers in understanding and value of the firm.
using financial data and reports.

Financing Decisions
-Financial managers determine when,
where, and how a company will acquire
funds. These funds can be obtained in
different ways. The two major methods
are equity financing and debt financing.
❖ Equity financing allows an
ownership interest in the
company to investors.
Corporate equity financing
is done through the sale of
stock. In other words, if the
funds come from the
company or owners
themselves, then it is
referred to as equity
financing.
❖ Debt financing is the use of
borrowed money to obtain
needed assets. Individuals
or institutions providing
debt financing are the
creditors who receive
payment in the form of
principal and interest.
Simply put, if the company
borrows funds from other
organizations to finance its
activities, then it is deemed
to be debt financing.
❖ The combination of equity
and debt used by a
company to finance its
operations and growth is
known as the company’s
capital structure.
Investing Decisions
-Investments are made to obtain the
assets needed for business operations.
One of the most important roles of a
financial manager is to help the company
make effective profitable investments.
Investment also involves short-term and
long-term decisions of using the funds
from selling assets.
❖ Short-term investment decisions
are the decisions related to the
everyday operation of a business.
These are also called working
capital decisions because they are
related to current assets and
current liabilities such as cash,
inventories , receivables, etc.
❖ Long-term investment decisions
are all such decisions that are
related to the investment of funds
for a long period. They are also
called Capital Budgeting decisions.
Operation Decisions
-involve the daily operations of the
company. In relation to this, the financial
manager needs to determine how to
finance working capital accounts like
accounts receivables and inventories, and
to plan objectives and goals concerning
routine tasks. The company has options
on whether to finance working capital
needs by long-term or short-term sources.
Dividend Policies
- A common goal of all business ventures
is to earn profit or to have a positive
return. In the case of profitability, the
financial manager decides how much
should be distributed among the
shareholders and how much should be
retained for future contingencies